The debate turns to escrow accounts and secondary sanctions
RESIDENT JOE BIDEN has promised to “ratchet up the pain” for Vladimir Putin over Russian atrocities in Ukraine. The EU vows wave after wave of “rolling sanctions”. Momentum is growing in the West to fire the two big economic weapons that have so far been kept largely locked in the arsenal: an embargo on Russian oil and gas, and “secondary” sanctions, which would penalise people and entities from other countries that trade with Russia.
Your browser does not support the
The European Commission is pushing hard for the EU to curb Russian energy imports, payments for which help fund Russia’s armed forces. So far, however, the bloc has banned just coal, which makes up only around 5% of Russian hydrocarbon exports to the EU—and with a four-month phase-out. Big importers, including Germany and Italy, remain wary of an immediate ban on oil or gas. Hungary, whose support is needed because of the EU’s unanimity principle, is more strongly opposed, and has called the issue a “red line”.
However, pressure is growing on the foot-draggers to accept some sort of blockade. A former adviser to Mr Putin has said a full oil-and-gas embargo could end the war. Ukraine’s president has stepped up criticism of Germany for its coyness. Paul Krugman, an economist and commentator, has contrasted Germany’s reluctance to accept sharp economic pain with its insistence that Greece and other countries do just that in the euro-zone crisis of 2009-12. An energy embargo was not formally discussed at a meeting of EU foreign ministers on April 11th. But several ideas short of an outright ban are percolating.
One is to impose tariffs on Russian hydrocarbons. Another, emanating from America, is to take a page out of the Iran playbook. When several allies complained that sanctions against the Islamic Republic a decade ago would leave them short of oil, America developed a workaround. Other countries could continue to buy Iranian oil if they pledged to reduce reliance on it over time. The payments went into escrow accounts. Iran agreed to this arrangement in part because it was permitted to use a chunk of the parked money for non-sensitive goods like consumables. “It functioned like pocket money,” says Adam M. Smith of Gibson Dunn, a law firm.
Russia would almost certainly reject such an arrangement. But Mr Smith thinks it could be tempted by sweeteners. One might be to allow it to use some of the cash in escrow to buy high-tech items that have been hit with Western export controls.
Support for secondary sanctions is strongest in America’s Congress. Its lawmakers are keen to “get back on the game” after leaving sanctions policy mostly to Mr Biden so far, says another sanctions lawyer. More than a dozen sanctions-related bills are circulating on Capitol Hill. Several could become law in the weeks after Congress returns from Easter recess. But when America imposed secondary sanctions on Iran, they were controversial: Europe even created a legal mechanism to try to neutralise them (which failed). With the outrage over Russian war crimes as strong in Brussels as in Washington, however, this time is different.
Such sanctions could be imposed in one of two ways, says Mr Smith: explicitly, through official measures, or implicitly, by leaning on other countries. American officials are understood to have raised the issue on a recent visit to India. “The threat could be sanctions, or curbs on correspondent banking, or increased red tape such as enhanced checks on investment and trade,” reckons Mr Smith. “Iran is still fresh in minds. When America says to other countries, ‘Be careful’, they know what it is talking about.”
The big question with secondary sanctions is how China would react. It has circumvented Western sanctions on Iran and North Korea by trading with them through small Chinese banks with no connections to Western financial centres—and which are thus less exposed to sanctions. Whether it could do the same with Russia’s much larger, more globally connected economy is unclear. The stakes would be a lot higher, for both China and the West.
For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. And for more of our recent coverage of the Ukraine crisis, visit our dedicated hub.
This article appeared in the Business section of the print edition under the headline “The ordnance in the arsenal”